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What is the strategy profit or loss

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Reference no: EM133056341

You have the following information "today."The spot market value of the S&P 500 index today is S0

  • = 4,378.
  • Put options on the S&P 500 index with a strike price of K = 4375 and 12 months to expiration have a premium of p = $540.58.
  • The continuously compounded, annualized risk-free rate is 1.74% per annum.

Suppose that you are a financial advisor. Your client, Ms. Moneypenny, plans to retire this month. You have warned her about sequence of returns risk. However, she still wants to hold a significant proportion of the retirement portfolio in a diversified portfolio of large cap stocks and has agreed to your proposal to construct a protective put on the equity portion of the portfolio.

For the sake of this problem, suppose that Ms. Moneypenny's stocks currently are worth $100 times the spot market value of the S&P 500 index today.

Now "jump ahead" in time to about one year in the future when the put option expires. Suppose that the stock market had a major correction and the S&P 500 index has fallen to 3,083. What is the strategy profit or loss?

Reference no: EM133056341

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